The month ended. The month is finished.
You then check the restaurant’s bank account.
The number you received isn’t exactly what you’d hoped for.
Restaurant owners may find it difficult to reconcile this issue, as they believe that cash flow and profits ought to be the same. Both of them don’t match together. It’s not true. P&L is a gauge of financial performance, while the bank account is a record of when money moves into and out.
Understanding the differences could help restaurant owners shift their perception of restaurant financials.
Imagine what happens on the typical week. The customers pay for food. Employees have to be paid. Food and drinks deliveries arrive with invoices. Rent is getting closer. The timing of credit card deposits is different. Taxes on sales are collected but it comes with the responsibility.
On the other hand, the next week’s shopping has already begun.
If you only focus on revenues and the numbers at the end of profits, it is easy to miss out on lots of activities.
The Clue May Be Hiding in Prime Cost
If the profitability of restaurants begins to decline, the cost of food, drinks and labor costs should be taken into consideration.
Together, cost of goods sold and the labor cost together make up the bulk of the cost. Bookkeeping Chef’s guidelines place the primary cost at around 60%-65 percent of the total revenue for many restaurants, while emphasizing the importance of monitoring weekly rather than waiting until the end of the month.
Effective prime cost management involves less focusing on a single percent and more being aware of early movement.
Imagine that the restaurant’s results are typically within a certain range however this week, it grew. Maybe overtime increased. Maybe the costs for beverages were stable, but food costs increased. An increase in the percentage of food items could cause the manager to look at the menu, purchases, waste, mix portions or invoices from vendors.
The percentage is the most important. It is in the underlying activity in the restaurant.
This conversation is possible because everyone will be able to remember what happened.
After a period of two to three weeks, it is much more difficult to reconstruct particulars.
Then the Vendor Bills Show Up
Restaurants might purchase food items during a week and pay for them the following week. This is a way to explain the reasons why profit alone isn’t enough to answer every cash question.
Vendor invoices have to be recorded, received then tracked and finally paid. In a busy business with multiple suppliers, managing that manually can become an administrative burden.
Automating accounts payable speeds up the process by reducing routine tasks like handling the payment and bill details. Bookkeeping systems that are connected can give the user a better picture of obligations which haven’t yet deposited into the bank account.
It’s advantageous because, considered as a whole a restaurant s bank balance might appear to be better than its actual short-term financial position.
The current balance could be $80,000 on the account. The figure of $80,000 means tiny if rental, vendors or payroll make up a large portion over the next few days.
That leads naturally to cash flow forecasting.
The most appropriate question to ask is “What happens to our money after we receive the money and have met our obligations we’ve made?”
This is a crucial distinction when deciding on the appropriateness of the appropriate time to make an additional purchase replacement of equipment, or maintain liquidity.
The Cash Was Never Really Yours
The example of sales tax is a good one.
The money that a restaurant receives from its customers will eventually need to be dealt with in accordance with the tax requirements. If those dollars are mentally associated with operating cash, the bank balance could create a false impression of the money available for spending.
The consistent recording system allows restaurants to comply with the sales tax laws while also providing a complete view of their financial position.
Restaurant accounting is more effective when the financial obligations of each restaurant are not considered separately.
Prime cost affects margin. COGS (cost of products sold) and future payments are affected due to purchases made by vendors. Payroll impacts both labor percentage and cash. Cash flow is impacted by the sales tax. P&Ls report financial performance, and forecasting lets management see the future.
Connect the pieces.
Bookkeeping Chef assists in bringing these elements together, using restaurant-specific reports and system integrations. For operators who don’t want to work all night reconciling financial data, outsourced bookkeeping services will handle much of the accounting workload without having to remove the owner from financial conversations.
The last point is vital.
Restaurant owners shouldn’t stop reading the books, regardless of whether they’re being handled by someone else. Owners should be provided with information in a form that will help them understand what’s happening.
Don’t be fooled into thinking that the P&L is incorrect if the bank account appears to be in good shape, but the P&L indicates that the restaurant has earned money.
Find out what happened between you and your partner.
This question can tell you more about your business than any other number.